Universa Investments L.P., run by Mark Spitznagel (with no ownership, but a significant investment from Black Swan author Nassim Taleb), is opening a new inflation fund, named the "Black Swan Protection Protocol - Inflation" fund (see WSJ article). While worries that inflation will be caused by increased deficit spending are nothing new (see recent blog post), the fund is making bets on what is expect will be hyperinflation - similar to, and possibly worse, than what was observed in the 1970s. Investments in the aptly named fund will include options tied to what are believed will be volatile commodities, such as corn, crude oil, and copper, in addition to associated stocks, such as the gold miners and oil drillers. The inflation fund is also making negative bets on Treasury bonds in expectation of higher yields and lower bond prices. While most investors believe that the economy will have to deal with inflation at some point, the timing is still a matter of debate. Given the use of options in the fund, which in the past tended to be deep-out-of-the-money puts when looking for a sell-off, it would seem that Spitznagel and Taleb are looking for a much quicker and, in this case, higher move to the upside for assets tied to inflation.

Following the recent comments of Yale's endowment investment chief, David Swensen (see previous post), over half of a group of recently surveyed asset managers believe that high-quality corporate credit is currently trading at cheap levels and will likely rally in 2009 (see Financial Times article). Many feel that the rush to the safety of Treasuries has caused all grades of corporates, even high-grade bonds, to be oversold. On the other hand, many of the same analysts, including Pimco's Mohamed El-Erian, feel that US Treasuries will face considerable pressure after their recent fear-driven price appreciation, which in some cases drove yields to near zero levels for some shorter duration issues. Given the current desire by the incoming Congress and the President-elect to fund numerous public sector and infrastructure projects, the government will be forced to increase its issuance of debt, putting further pressure on Treasury prices.